In a new paper, Market Mechanisms for Resource Adequacy and System Security: Framing the Issues, RAP identifies new challenges that system planners and market designers face and offers recommendations for framing the discussion around “capacity markets” in Poland, Germany, and Europe. Prepared in cooperation with the Center for International Relations for the conference Capacity Market-Solution for the Future?, the paper addresses the underlying questions of market design and system security in 21st century power systems.
While both Poland and Germany have different resource mixes and different immediate challenges, both are considering power market reform to meet system needs, including the role that a capacity mechanism might play. As power systems evolve to include more variable renewable resources, a new reliability challenge emerges. The question of reliability can no longer hinge on securing adequate baseload capacity. Rather, it rests on acquiring resources with the flexible operational capabilities needed to balance an increasing share of variable supply. The key is to ensure that markets properly value resource flexibility.
Delivering investment for a reliable power supply to consumers at a reasonable cost has always been a central objective of power market design. In considering new market elements, it is essential to identify whether energy markets are falling short of providing the short- and long- term price signals need to maintain system reliability; and if so, why and what is needed? Failing to properly assess current market dynamics or choosing an inappropriate mechanism can lead to over-investment.
RAP recommends expanding the discussion beyond capacity markets to consider three market mechanisms with the potential to secure greater resource flexibility and least cost—Enhanced Services Market Mechanisms, Apportioned Forward Capacity Mechanisms, and Strategic Reserves. Each mechanism interacts differently with power markets, and its appropriateness will depend on current market structure and dynamics.
RAP further highlights the need to consider the role that broader power systems can play in helping to meet flexibility as European energy markets become increasingly integrated. This includes how the German and Polish power systems can complement each other to meet system demands at lower cost than “going it alone.”